Have you ever received a call or e-mail advising your regular direct debit was declined due to insufficient funds?
Or perhaps you’ve booked an appointment with your hairdresser or physio, only to realise after the treatment there’s not enough money left in your account to pay?
Or maybe the cupboard was bare, the petrol tank empty and so was your bank account?
In those moments it’s instinctive to whip out our credit cards, make the payment and breathe a sigh of relief as we go on our merry way.
But that is where the debt downfall begins. The credit card hasn’t solved the problem, it’s just postponed the pain.
A better alternative
If you have all your money sloshing around in a single account it is very difficult to know what you can afford to spend on unplanned things such as impulsive indulgences.
Instead set aside money for all those expenses you already committed to or wouldn’t forgo. In that way, you’re not caught short when they are due and drawn into using debt to pay for them.
This is the behaviour of the financially fit that I call ‘cover your commitments’, and is a subset of the behaviour to ‘plan for the predictable‘.
- Subscriptions (streaming, gym, software)
- Phone and internet
- Rent or loan repayments
- Public transport and/or parking
- Council rates
- Strata fees
- Drivers licence
- Car registration and servicing
- Sporting club memberships and game fees
- School fees (each term)
Commitments also include regular essentials such as:
- Personal grooming (hair & beauty)
Commitments also include an allowance for the typical amount you spend on infrequent essentials and comforts, especially if you would not forgo them. For example:
- Children’s education costs including fees, books, uniforms, excursions, tech
- Health (doctor, dentist)
- Gifts and celebrations (birthdays, Christmas, anniversaries)
I define infrequent expenses as those that occur at least once per year but not every pay cycle.
Get covered today
If you don’t already use this element of a bucketing strategy then here’s the steps to get covered:
- Go through your recent account transactions and add up the commitments and any essentials you wouldn’t forgo
- Calculate the amount per pay cycle that you need to set aside
- Establish an automatic transfer every pay into another account
- Change your direct debits to be deducted from that commitments account
Also, each time you book an ad-hoc appointment for something like the physio immediately transfer money from your everyday account into your commitments account so you can be confident you’re covered.
If you need to establish a new bank account for your commitments these are the account characteristics to look for:
- Payment facilities such as EFT, direct debit and BPay
- Maybe a debit card
- Earns interest
- No penalties for withdrawals